Startups & Founders

However you like — but subject to vesting, always. The split itself is a business judgment about contribution, risk and role, and reasonable founders land anywhere from even to heavily weighted. What matters far more than the number is that nobody keeps equity they did not earn.

The standard structure is four-year vesting with a one-year cliff: nothing vests until twelve months, then monthly. Apply it to founders too, not just employees. Investors will insist on it later regardless, and imposing it on yourselves at the start is a far easier conversation than being forced into it during a round.

Pair it with a repurchase right so the company can buy back unvested equity when someone leaves, and with the 83(b) election filed within thirty days of the grant. Those three things together are what turn a co-founder departure from an existential problem into an administrative one.

You lose the election. The thirty-day window in IRC § 83(b) is statutory and there is no general relief for a late filing.

The consequence is that each vesting tranche is taxed as ordinary income at its value on the vesting date. If the company grows, you owe cash tax on stock you cannot sell — the classic paper-gain trap. You also lose the earlier start on the capital gains and § 1202 holding periods.

Send it certified mail with return receipt and keep the receipt with your corporate records forever. It is a one-page filing whose proof of mailing you may need a decade later.

Probably the contractor, unless there is a signed written assignment. The work-made-for-hire doctrine covers employees within the scope of employment and, for independent contractors, only a narrow list of specially commissioned categories — software generally is not on that list.

Paying an invoice does not transfer copyright. Neither does a purchase order, a Slack message, or the parties’ obvious intent. It takes a signed writing.

If this describes you, fix it now with a confirmatory assignment while the relationship is still good. A former contractor who learns during your diligence period that they hold leverage will price it accordingly, and I have watched that delay a closing.

They are simple, not safe. A SAFE is not debt — no interest, no maturity — which removes the risk that a note comes due before the round arrives. That genuine advantage is why they dominate early rounds.

The risk is arithmetic. Founders raise on a series of SAFEs with different valuation caps and no running model, and discover at the priced round that conversion plus the option pool has taken far more of the company than they believed. Post-money SAFEs in particular allocate dilution to the founders, not to the earlier investors.

Build the conversion model before you sign the second one. If your cap implies a valuation the market will not give you, you have created a down round in advance.

You can, and it is one of the more consequential risks founders take casually. Selling equity is a securities transaction. Federal and Missouri law both require registration or an exemption, and an exemption applies only if you meet its conditions.

Most rounds use Rule 506(b), which permits accredited investors and a limited number of sophisticated non-accredited ones, prohibits general solicitation, and requires a Form D filing. Missouri notice filings apply as well.

The exposure is not theoretical: an investor in a failed offering may have a rescission right — the ability to demand their money back — and personal liability can reach the founders. It is also the first thing sophisticated investors examine, and a defective early round is a real obstacle to a later one.

Only if you are raising institutional venture capital, or realistically will be within a couple of years. Investors expect it, their documents assume it, and Delaware’s corporate case law is genuinely deeper.

For everyone else it is a net cost: Delaware franchise tax, a Delaware registered agent, foreign registration in Missouri where you actually operate, and two sets of filings — in exchange for benefits a Missouri company never uses.

Converting a Missouri LLC into a Delaware C corporation is well-trodden work that happens alongside a round. The one thing conversion cannot recover is the § 1202 holding period, which runs from the date the C corporation stock is issued — the strongest argument for starting there if venture money is the actual plan.

An independent appraisal of your common stock’s fair market value, used to set option strike prices. If you are a corporation granting stock options, you need one — and you need it refreshed roughly annually or after any material event, such as a financing.

The reason is unforgiving: options priced below fair market value can trigger immediate income recognition plus an additional 20 percent penalty tax under IRC § 409A — and the person penalized is the employee you were trying to reward.

A defensible valuation from a qualified provider shifts the burden to the IRS to prove it unreasonable. For an early company, this is a modest, budgetable expense and not a place to improvise.

Read the documents first. If you have vesting and a repurchase right, the answer is largely mechanical: unvested equity is repurchased, vested equity stays, and the departure is documented.

If you have neither — which is common — your former co-founder still owns whatever they were issued, with whatever voting rights came with it. There is no statute that takes it back because they stopped contributing.

What is usually available is negotiation, and it works better early than late. A departing founder who wants to be finished will often accept a reduced stake and a clean release. The same person, contacted for the first time when you are signing a term sheet, understands exactly how much leverage they hold.

The pool is shares reserved for future employee equity. The mechanic founders miss is the “pool shuffle”: investors typically require the pool to be created or expanded before the financing, inside the pre-money valuation — which means existing shareholders absorb all of it.

The practical response is to negotiate the pool’s size against a real hiring plan rather than accepting a default percentage. A pool sized for twenty hires you do not intend to make is dilution you gave away for nothing.

Model the fully-diluted cap table including the pool and any converting SAFEs before you agree to a pre-money number. Two founders regularly discover that a headline valuation they were pleased with leaves them with materially less than they assumed.

If you are not raising priced venture rounds, very likely yes. Missouri LLCs have no annual report, no annual fee, pass-through taxation, and a fraction of the formality of a corporation. Bootstrapped and revenue-funded companies are frequently better served by one for years.

The limitations appear when you want conventional stock options, when institutional investors will not buy LLC units, and when § 1202 treatment matters — it requires C corporation stock.

An LLC can also elect corporate or S corporation taxation without changing its legal form, which covers a good deal of middle ground. The decision is worth twenty minutes with a lawyer and your accountant together, and it is not permanent.

Fewer than you fear. Formation documents; an operating agreement or bylaws with a shareholder or founders’ agreement; founder equity documents with vesting, plus the 83(b) elections; and a confidentiality and invention assignment agreement signed by every founder, employee and contractor.

Then, as they become relevant rather than in advance: an option plan, customer terms, a mutual NDA, and financing documents.

What you do not need on day one is a trademark portfolio, a patent strategy, or a fifty-page privacy program. Startup legal work is properly sequenced, and a lawyer who sells you all of it at once is not doing you a favor.

You need to clear it before launching, which is different and cheaper. A search for conflicting marks in your class costs very little compared to rebranding after a cease-and-desist arrives with customers already in hand.

Registration itself can wait until the name has proven durable, though filing early secures priority and an intent-to-use application can hold a name before you launch.

The expensive mistake is neither searching nor filing, building brand equity for two years, and then meeting a senior user with a federal registration. At that point every option is bad, and one of them is starting over.